Salem Communications Corporation (SALM)
Q4 2005 Earnings Conference Call
March 8th 2006, 1:30 PM.

Executives:

Eric Jones, Director of Communications, Investor Relations
Edward Atsinger, President, Chief Executive Officer
Evan Masyr, Vice President, Accounting & Finance
David Evans, Executive Vice President - Business Development and CFO

Analysts:

Jonathan Jacoby, Banc of America Securities
James Dix, Deutsche Bank
Leland Westerfield, Nesbitt
Chris Ensley, Bear Stearns
Jim Goss, Barrington Research
David Bank, RBC Capital Markets
Bishop Cheen, Wachovia Securities
Bobby Melnick, Terrier Partners
James Marsh, Hanover Square Capital

Presentation

Operator

Good afternoon, ladies and gentlemen. My name is Sandra, and I will be your conference facilitator today. At this time I would like to welcome everyone to your Salem Communications Fourth Quarter and Full-Year 2005 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. If would you like to ask a question during this time, please press “*”, then the number “1” on your telephone keypad. If would you like to withdraw your question, press the “#” key. Thank you, it is now my pleasure to turn the floor over to your host, Mr. Eric Jones. Sir, you may begin your conference.

Eric Jones, Director of Communications, Investor Relations

Good afternoon. And thank you for joining us today for Salem Communications Fourth Quarter Conference Call. As a reminder, if you get disconnected at anytime you can dial 973-582-2734 or listen from our website at www.salem.cc. We will begin in just a moment with opening comments from our President and CEO, Edward Atsinger; and Vice President of Accounting and Finance, Evan Masyr. After their opening comments, our conference call operator will come back on the line to instruct you on how to submit questions. David Evans, Executive Vice President of Business Development and CFO will participate in the question and answer portion of our call. As David is calling from his home as he has a pinched nerve in his back.

Please be advised that statements made on this call that relate to future plans, events, financial results, prospects of performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those anticipated as a result of certain risks and uncertainties, including but not limited to market acceptance of Salem’s radio format, competition in the radio broadcast, Internet, and publishing industries and new technologies, adverse economic conditions, and other risks and uncertainties detailed from time-to-time in Salem’s reports on Forms 10-K, 10-Q, 8-K and other filings filed with or furnished to with the Securities and Exchange Commission.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Please undertake Salem undertakes no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events. This conference call also contains non-GAAP financial measures within the meaning of Regulation G, specifically station operating income, EBITDA and adjusted EBITDA. In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures, including a reconciliation of such non-GAAP financial measures included in this conference call and the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles is available on the Investor Relations portion of the company’s website. As part of the current report on Form 8-K in the earnings release issued by Salem earlier today. I will now turn the conference call over to Edward Atsinger.

Edward Atsinger, President, Chief Executive Officer

Thank you, Eric. And thank you all of you who have joined us for today’s conference call. During the challenging fourth quarter, we continued to fulfill our business purpose of super-serving the large and growing audience interested in Christian and family-themed content through our radio, Internet and publishing platforms. Our radio stations achieved a 1% same station revenue growth and a 3% same station operating income growth. Although obviously not as strong as in several recent quarters, our growth of same station net broadcasting revenues still compares favorably in Q4 of ‘05 by, in fact, about 400 basis points to the industry’s 3% decline as reported by the radio advertising bureau.

Our financial results for Q4 of 2005 reflect also the absence of $1 million political advertising revenue, which we had in Q4 of ‘04 and the results are inline with the guidance we provided in our third quarter ‘05 earnings release. I want to detail our fourth quarter activity in the context of our ongoing initiatives to grow our businesses, focusing on our three strategic radio formats, our national advertising business and our Internet businesses.

Let’s talk first of all about the News Talk stations of our most recently focused and growing format. We have 34 News Talk stations serving eight of the top ten cities in America and 20 of the top 25. Stations in this format contributed 15% of our total net broadcasting revenue for the quarter. And achieved a 24% increase in net broadcasting revenue compared to the same quarter last year. On a same station basis, our News Talk stations grew net broadcasting revenue by 16%. Since 2003 we have more than doubled the number of stations we operate in this format, adding stations in such markets as Chicago, Philadelphia, San Francisco, Detroit, Miami, and I believe we have a significant revenue and profit upside as we develop these stations to maturity. One way to quantify the upside is by comparing our actual average audience share and actual average power ratio for these stations with our goals. Currently our 34 News Talk stations have an average 12-plus rating share of 0.7 and an average power ratio of 0.6, and they generated $28 million of revenue in 2005. Our first goal is to achieve a four-book average rating share of 1.0 and an average power ratio of 0.8. Achieving this audience share and power ratio would result in an additional $20 million of revenue from these stations assuming that the radio dollars going into these markets remain constant in 2005 terms.

Once we’ve achieved this initial goal, the next goal will be to drive the ratings for these stations to a four-book average of 1.5 and an average power ratio of 0.9, which would equate, again on the assumption the radio dollars remain essentially the same for these markets would equate to an additional $33 million in incremental revenue. So achieving these goals represents one of Salem’s more significant opportunities for growth, and we’re concentrating our resources on doing just that. A second initiative to grow our company is to bring to maturity our contemporary Christian music stations. We have 14 stations in this format, which as a group contributed 22% of our total net broadcasting revenue for the quarter. In most markets we promote this format as the fish. These stations are also branded as safe for the whole family because of our commitment to provide radio programming that is appealing, entertaining, while remaining consistent with the core values of our target audience.

Same station CCM profitability decreased slightly to $3.6 million in Q4 of 2005 from $3.7 million in Q4 of 2004. Same station revenue at our CCM stations was flat for the quarter compared to Q4 of ‘04 but if we exclude KLTY in Dallas, which had a 5% decrease in revenue for the quarter due to the inventory reduction program that we started in March of 2005, our CCM stations would have achieved same station revenue growth of 3% in Q4 of ‘05. March 1st marks by the way the one-year anniversary of the inventory reduction program that we initiated at KLTY. This decision to reduce this inventory was the right decision, the station’s ratings have increased 15% based on a four-book average in the fall of 2005 for KLTY’s target demographic of females 25-54, and we now expect KLTY to return to positive revenue growth.

Now, as you know KLTY in Dallas continues to be a market-leading highly profitable franchise. Replicating KLTY’s performance at our other CCM stations is a key focus. The station’s best position to achieve performance similar to KLTY’s measured by ratings and power ratios, are those stations that enjoy full market signals: Atlanta, Portland, Cleveland, Sacramento, Jacksonville and Honolulu. The 2005 four-book average for all people 12-years old and older, on the basis of average quarter hours share for these stations was approximately 2.4, with a power ratio of approximately 0.8. On the other hand KLTY, the franchise we are working to replicate, achieved a 3.2 share for the same period and a power ratio of 1.4. This combination of a 32% ratings increase with a 67% power ratio increase represents another significant growth opportunity for Salem.

Our third initiative is to continue to grow revenues at our 44 Christian teaching and talk stations. These stations achieved same station revenue growth for the quarter of 2%. However, if we exclude a political advertising as a factor, revenue for the quarter would have grown by 4%. Stations in this format contributed 51% of our total net broadcasting revenue during the quarter. An important and unique feature of the Christian teaching/talk format is their stable national and local block programming business, which contributed 54% of the revenue on the Christian teaching/talk stations or 28% of our total net broadcasting revenue for the quarter. At the end of each year, we negotiate renewal rates with national block programmers that purchase time on these Christian teaching/talk stations, the new rates are effective for the entire upcoming year. We announced earlier today the average increase in rates for 2006 is 5%. This block programming business remains rock solid and is an important underlying factor in the stability of our overall business.

Our fourth initiative is to grow our national advertising business. The lack of political advertising in Q4 of ‘05 compared to Q4 of ‘04 made a growth difficult for the quarter. And same station national advertising revenue, including spot and network revenue declined by 3% to $800 million. If you again want to exclude political same station national advertising revenue increased by 7%, which represents good underlying expansion. While Salem has historically sold less national advertising than the average general market radio company, advertisers are beginning to recognize the exceptional value of our platform. Not only do we provide the most efficient way to reach listeners interested in Christian and family-themed programming nationally but we can also readily demonstrate through results the size and buying power of the audience. We’re confident in our ability to continue to expand this business.

The fifth initiative that I want to discuss is the opportunities that afford us to develop the Internet business further. During the quarter, our Internet business revenue grew by 15% to $1.7 million and generated $300,000 profit. Monthly page views increased by 28% to 47 million, and our network of sites averaged more than 4 million monthly unique visitors. Since December, we strengthened our position as the leading Christian content provider on the Internet by acquiring ChurchStaffing.com and CrossDaily.com. Church Staffing is the preeminent source for online job search information targeted to church professionals. And it is a natural compliment to our existing ChristianJobs.com website.

We acquired ChurchStaffing.com for $3.1 million, a purchase price that represents a multiple of expected first year EBITDA of 10 times. Cross Daily is an online provider of Christian content, graphics and online community resources. We acquired CrossDaily.com in February of 2006 for $2.3 million. A purchase price that represents a multiple of expected first year EBITDA of 9 times. Each of these acquisitions was, you could say, in format, when acquired, and was generating positive cash flow.

Let me conclude my prepared remarks by mentioning the recent action taken by our Board of Directors authorizing the repurchase of up to an additional $25 million of Salem Class A common stock. Given the growth potential of these five initiatives that I just outlined, the upside at our developing News Talk and music stations, recognition by national advertisers of the reach of our platform and the importance of the audience, our consistent block programming business, and our rapidly developing Internet platform, we consider Salem’s recent stock price weakness to provide a good opportunity to create value for our shareholders by investing in our own stock. I’ll now turn the call over to Evan Masyr for a more detailed discussion of our fourth quarter 2005 results and our first quarter of 2006 guidance. Evan?

Evan Masyr, Vice President, Accounting & Finance

Thank you, Ed. Our results for the fourth quarter of 2005 were issued in a press release earlier today, and are available on the Investor Relations portion of our website. I will briefly review these results. Net broadcasting revenue for the fourth quarter increased 5% to $51.5 million, and SOI increased 5% to $19.8 million. On a same station basis, net broadcasting revenue grew 1% and station operating income grew 3%.

Let me also provide some detail on same station growth rates by revenue type. For those growth rates that are significantly affect by the absence of our $1 million of political advertising in the fourth quarter of ‘05 numbers but present in the fourth quarter of ‘04 numbers, I will also provide same station growth rates that exclude political.

Beginning with block programming, same station revenue grew 8% to $15.6 million. Same station local advertising revenue declined by 1% to $21.5 million. However, excluding political it increased by 1%. Same station national advertising revenue including spot and network revenue declined by 3% to $8 million. Excluding political, it increased by 7%.

Finally, other revenue, which includes in commercials declined by 3% to $2.7 million. Included in our same station numbers is broadcasting revenue from 84 of our 104 radio stations in our network, representing 93% of our net broadcasting revenue. Regarding our balance sheet, as of December 31, 2005, we had net debt of $321 million and were in compliance with all covenants. Our bank leverage ratio was 4.94 as of December 31st, versus a compliance covenant of 6.25. Our bond leverage ratio was 5.35 versus a compliance covenant of 7.0.

During the quarter ended December 31, 2005, Salem repurchased 274,542 shares of its Class A common stock for $5 million. As of March 6, 2006 we had repurchased 1,475,362 shares of Class A common stock for approximately $24.8 million. For the first quarter of 2006 we are projecting net broadcasting revenue to be between $49 million and $49.5 million, reflecting low single-digit growth compared to first quarter of 2005 net broadcasting revenue of $47.5 million. SOI is projected to be between 16.8 million and 17.3 million reflecting flat to slightly negative growth compared to first quarter of 2005 SOI of $17.3 million. And net income per diluted share is projected to be between $0.01 and $0.02 per share. Our first quarter 2006 outlook includes 0.8 million of non-cash compensation expense related to the adoption of FAS 123R based on stock-options currently outstanding.

Our first quarter 2006 outlook reflects the following. Same station net broadcasting revenue growth in the low single-digits compared to first quarter of 2005, same station SOI growth in the low single-digits compared to first quarter of 2005, reduced inventory loads at KLTY 94.5 FM, our contemporary Christian music station in Dallas, continued growth from Salem’s underdeveloped radio stations, particularly our News Talk and CCM stations, fixed cost associated with recently acquired stations in Detroit, Honolulu, Miami, Omaha, Sacramento and Tampa markets, and the impact of recent acquisition, exchange and divestiture transactions. This concludes our prepared remarks and we will now open the floor for some questions. Operator?

Questions & Answers

Operator

Thank you. Operator Instructions We’ll pause for just a moment to compile the Q&A roster.

Your first question is coming from Jonathan Jacoby of Banc of America Securities.

Q - Jonathan Jacoby

Hi. Just two questions here. Firstly, if block programming is roughly about 35%, growing at 5%, should we then assume sort of negative growth for the rest of your business on the broadcasting side in the first quarter? Second question, leverage is roughly about five-and-a-half times. How much literally do you really think you have to buy stock here? Thanks.

A - Edward Atsinger

Why don’t we — David, if you picked up the question, you might want to take a shot particularly at the second part of it. But, Evan?

A - Evan Masyr

Certainly on the second one, the buyback capacity, at this point we think we can buyback a total of approximately $39 million of stocks, so an additional 14 million given our current leverage ratios.

Q - Jonathan Jacoby

And that would take you to what about six times?

A - Evan Masyr

That would take us to, I think about –

Q - Jonathan Jacoby

Okay. And then on the first question?

A - David Evans

Yeah on your first question, Jonathan can you hear me I’m calling from a different line so there might be a little interference. We had a particularly challenging January. And we were in negative territory for the month. We are seeing sequential improvement into February, into March but for the first quarter as a whole the balance of our business outside of block programming will be flat to down slightly.

Q - Jonathan Jacoby

Okay. Thank you.

Operator

Thank you. Your next question is coming from James Dix of Deutsche Bank.

Q - James Dix

Good morning. I guess your time, gentlemen. I had a couple of questions. Just first for us for modeling purposes, I mean, if you could layout what the same station base is for, I guess, your first quarter guidance in terms of revenue and station operating income, and I guess if you had a kind of a comparable number for the full year 2005, just so we had some sense as to what you’re considering same station going into the year? I guess also, Evan, I think you mentioned that same station in the fourth quarter accounted for 93% of revenue. Do you have what — how much of station operating income, those same stations, those stations accounted for? And then I guess in terms of your guidance, any way to quantify some of the impact of the items you listed in the release on first quarter and then how they should change in the second quarter through fourth quarter specifically? I’m thinking of, you know, the costs for your News Talk stations, some of the fixed costs on some of your recently acquired stations and any impact of swaps?

A – Evan Masyr

Okay.

Q - James Dix

And that’s it.

A – Evan Masyr

Okay. Let’s start with you r first question here, same station base in Q1 of ‘06. Revenue, the same station base, it would be 46.6 million. And SOI, 17.5 million. Your second question was, you want to know what percentage of SOI was in our same station in Q4, correct?

Q - James Dix

Yes.

A – Evan Masyr

Let’s see. It was, hold on. Virtually all of it, 98%.

Q - James Dix

Okay.

A – Evan Masyr

And what was your third question?

Q - James Dix

Just — well, actually on the first one I actually want to know whether you had a same station base number for the full- year ‘05?

A – Evan Masyr

We do not have one for the full year.

Q - James Dix

Okay. And then I guess my final question was, just if you list a couple of items in the last press release as affecting your first quarter results specifically, investment, I guess, in the News Talk and CCM stations, some fixed costs associated with recently acquired stations, and then the impact of the, I guess, divestitures or exchange transactions, any way for us to think about at least in aggregate what the revenue and BCF impact is there?

A - Evan Masyr

Dave, do you want to take or crack at that one?

A - David Evans

Let me find a couple of pieces of that.

Q - James Dix

Okay, thanks.

A - David Evans

Hopefully most prominent is KLTY in Dallas since we’re projecting that for the first quarter, KLTY’s revenues are down about 5% compared to last year. Having said that, KLTY will revert to positive revenue and profit growth beginning March 1, with the anniversary day of the inventory reduction program. In terms of costs associated with recently acquired stations, I am imagining that you’re going to see 700 to $800,000 worth of quarterly start-up losses from those stations, and those start-up losses will gradually be eliminated during the course of 2006. I think those would be the two largest contributors.

Q - James Dix

Okay. Great.

A - David Evans

Okay?

Q - James Dix

Thank you.

Operator

Thank you. Your next question is coming from Lee Westerfield of Nesbitt.

Q - Leland Westerfield

Thank you very much, gentlemen, good afternoon. Two questions, first on Dallas and the second on your Internet investing this year. Just based upon our own tracking of commercial airtime we had seen in January, the Dallas station cuts 20% of its time and again in February 20% of its time, so if you’re down in revenue only 4%, I guess that would imply that your effective pricing is actually up in the 15 to 16% range? Does that furthermore implies that come March, we can — and then in the second quarter we might expect double-digit revenue growth out of that station? And then secondly how much did Dallas represent in revenue overall in the fourth quarter, and then I’ll ask the question on the Internet.

A - Evan Masyr

David Evans, you better take a shot at that.

A - David Evans

Yeah. In terms of your first statement, yes, indeed, our average rates in Dallas are up significantly with the inventory reduction program. The fact is that the spots that we got rid of when we initiated the inventory reduction program for the stocks that had the lowest rates. So that pushed up our rate structure overall in the station vis-à-vis what the station will look like post March 1, I expect to see it deliver low to mid single-digit revenue growth. I don’t think we’re anticipating at this time anything more than that. And so I think that’s what I would model for KLTY for the balance of the year. Evan, do you happen to have the Q4 KLTY numbers handy so we can see a snapshot of its percentage revenue and SOI contribution?

A - Evan Masyr

I do. On a percentage of revenue it’s in the 7% to 8% range of our total net broadcasting revenue.

Q - Leland Westerfield

And, sorry, for what period was that, Evan?

A - Evan Masyr

That’s for the fourth quarter.

Q - Leland Westerfield

That’s perfect, thank you. And then on the Internet side, you know, you’ve been doing some significant multi acquisitions, different interesting URLs and so forth. The question I have is really in the first quarter you’re signaling a negative cash flow from the Internet and other divisions. You were up a year ago admittedly in the few hundred thousand dollar range. So, the question I have is really, is it your plan this year to be investing for the full-year 2006, to be investing, say, negative EBITDA in that area as you build out the various more recent acquisitions, Church Staffing, Cross Daily, etc.?

A - David Evans

Yes, if you examine Q1, Lee, there are a couple of factors that impact Q1 that won’t impact the rest of the year. There’s one factor that will impact the rest of the year. You know, Q1 we always have a seasonal magazine publishing loss, that’s reflects in our Q1 numbers. Its profitable Q2, Q3, Q4, but the first quarter is always the weakest quarter because of lack of record company releases. On the Internet side in Q1 we are incorporating Church Staffing and Cross Daily for the first time, so there are some one-time costs related to integrating those new websites into our infrastructure. But once we hit Q2, Q3, Q4, those will be profitable accretive acquisitions. The final answer I mentioned that we will have an impact both of the whole year, we are going to be launching our own national News Talk website, that will mirror what our News Talk radio stations do on the Internet, and that new venture will have some start-up losses during 2006, probably amounting to about, probably somewhere between 800,000 and a million dollars in start-up losses related to that new website.

Q - Leland Westerfield

Net David does that signal that Q2, Q3, Q4 would be breakeven to positive in that Internet and other line?

A - David Evans

I think they would be positive for three quarters.

Q - Leland Westerfield

Thank you. Thanks very much gentlemen.

A - David Evans

Thanks.

Operator

Thank you. Your next question is coming from Chris Ensley of Bear Stearns.

Q - Christopher Ensley

Good morning, thanks. Just wondering in the first quarter guidance, if on a local and national basis you’re seeing sort of the same dynamic, local maybe excluding political, you know, comparing it to the fourth quarter, sort of low single and national up mid to high or if any of that dynamic has changed at all. In the second quarter, I was wondering if you – if the tone of business has changed at all. I would guess that KLTY alone would cause that to improve fairly nicely. And then finally you mentioned 9 million of revenue producing CapEx. And I was wondering if you could just discuss one or two of the bigger projects and what kind of, you know, would we see the return on that in ‘07? And what, perhaps, kind of return we might see?

A - Evan Masyr

I can take a shot at the last question. The biggest income producing CapEx expenditure is a building which we have purchased and which we are actually building in Honolulu that will allow us to house all of our stations at one location, and free up the obligation of paying rent, plus we’ll also have a little built of additional square footage that can be made available to third party lessees. We will have some build out expenses associated with the acquisition of Detroit. That’s more of an acquisition related expenditure rather than income producing, the biggest one is the building in Honolulu and there is a significant dollar amount associated with that.

Q - Christopher Ensley

And when might that be complete?

A - Evan ...